Investigating corruption: Sale of Mongolia's Erdenet Mine

Lkhagva Erdene and Sergey Radchenko

By Lkhagva Erdene and Sergey Radchenko

Published on 10th August, 2017

“I will talk about the good news today. It’s been nothing but good news as of late.” Fiddling with a set of paper pads, Mongolian Prime Minister Chimed Saikhanbileg half-read, half-spoke to a small crowd of journalists. Behind him, Chinggis Khan looked on from the wall, unperturbed. The good news, Saikhanbileg said, was that at last Mongolia would gain full ownership of a sprawling copper mining complex, Erdenet, which it had until then shared with the Russians. Another colonial legacy buried at last. A day to be proud of, June 28, 2016 – a day to remember forever, or at least until the next morning.

In the morning of June 29, Mongolia went to the polls. The electoral contest that pitched the ruling Democratic Party against its main challenger, the Mongolian People’s Party, was resolved by midnight. The democrats faced an astounding rout: 65 of the 76 seats in the Parliament went to the MPP, leaving the demoralized, fractious, tired Democratic Party with only nine. If Saikhanbileg expected to arouse patriotic sentiment, he badly miscalculated. The promise of Erdenet did not help his party. Saikhanbileg, too, was trampled over in the political melee, losing his parliamentary seat and his premiership.

But even as Saikhanbileg stepped aside, questions remained: what exactly was on that piece of paper that he waved in front of the journalists on the day before the elections? Who bought Erdenet, how and why? And who will benefit as one of Mongolia’s largest mining ventures changes hands? There are also lingering geopolitical questions: why did Vladimir Putin agree to relinquish such a significant asset in a neighboring country where, by all accounts, Russia is striving to preserve and increase its leverage?

Erdenet is Mongolian for “treasure.” Legend has it that in the old times Chinese prospectors mined the site but they were killed by a bolt of lightning. The Russians fared better. In 1973 the Soviet and Mongolian governments established a joint venture to develop a copper and molybdenum mine at what still is one of the largest deposits of copper ores in the world. Production began in 1978. Erdenet was not just a factory; it became Mongolia’s third largest city – an agglomeration of ugly apartment blocks clustered to the side of a gargantuan Martian-red pit.

Copper was shipped to the USSR at below-market prices, fueling Mongolian frustration with the semi-colonial economic relationship. The collapse of the Soviet bloc changed that. In 1991 the original joint venture agreement was updated, leaving Mongolia with 51 percent of the enterprise to Russia’s 49 percent. This was not a relationship made in heaven. The Russians had little control over the venture. Until 2011, when Mongolia repealed its windfall profits tax, 90 percent of the profits were siphoned off as taxes, leaving little to Russia.

Still, from Moscow’s perspective, Erdenet was an important strategic asset. Having lost ground in the 1990s (mostly to China, now by far Mongolia’s largest trading partner), the Russians took comfort in the clout afforded by their joint ventures in Mongolia: the trans-Mongolian railroad, the company Mongolrostsvetmet (which mines fluorite, gold, and iron ore), and, of course, Erdenet – the three pillars holding up the imposing dome of Russia’s fading economic influence.

Economically, though, these assets are something of a drag. The aging railroad requires investment of capital for repairs and upgrades, something Russian Railways – a 50 percent owner of the railroad – has had to commit to in the (still unrealized) hope of leveraging its presence in Mongolia to gain access to important copper and coal deposits in the Gobi desert. Meanwhile, Erdenet and Mongolrostsvetmet, though not losing money as had happened in the past, yield very insignificant profits. In 2015 consolidated profits of both assets are said to have been a paltry $4.6 million.

The tumbling of copper prices since 2011 have hit Erdenet hard, eating into profits. In Moscow, there was mounting frustration with the bureaucratic obstacles of managing the joint venture, and with the unwillingness of the Mongolian-run management to consult with the Russians on key operational questions. The Russian shareholders – at least those with a modicum of economic sense – could not be blamed for wondering: what’s in it for us? So when the Russians were offered a hefty $390 million for their stake in Erdenet and another $10 million for Mongolrostsvetmet, it is perhaps not so surprising that they decided to cash in.

But then, again, the value of these assets for Russia was not in the profits that they consistently failed to deliver. The value was in the leverage they afforded, and in their genealogy, which goes back to the heyday of the unbreakable Russian-Mongolian friendship. The Russian shareholder – the state-owned company Rostec – would have needed the government’s approval to pull out of such an important geopolitical investment. This means, in practice, agreement from Putin. And Putin does not always follow the money.

Lkhagva Erdene is an investigative journalist with MongolTV in Ulaanbaatar, Mongolia and Sergey Radchenko is Professor of International Relations at Cardiff University, U.K. and Global Fellow at the Woodrow Wilson Center for International Scholars, Washington, DC. The article was first published in the Diplomat and is republished here with due permission of the author.

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